The fund says such a plans could work, but only as part of a carefully calibrated and comprehensive program to deal with the mountain of bad debt weighing on the economy.

“They are not a comprehensive solution by themselves,” say the three authors of the paper, James Daniel, José Garrido and Marina Moretti. “Indeed, they could worsen the problem, for example, by allowing zombie firms (nonviable firms that are still operating) to keep going.”

The U.S. successfully used securitization and debt-for-equity swaps to wind down overleveraged industries in the wake of the financial crisis.

But, the IMF said, such efforts could backfire by allowing weak firms to keep going without an adequate overhaul.

“Getting the design right is critical,” said Mr. Daniel, the IMF's China mission chief, and his coauthors.

The government should only allow debt-to-equity conversions for companies that have overhaul plans that can put them back into the black, the IMF said. Securitization of nonperforming loans requires a broad, diversified pool of bad debt, banks preserving some interest in the companies and a legal structure that gives creditors the power to restructure companies and sell assets a market value.

China’s legal system and the complicated relationship many of the companies have with the government could bedevil Beijing’s efforts, however.